Description

Colombia Country Risk Reports Q2 2015 Description

We believe that Colombia's economy will benefit from solid private consumption in the coming years. That said, with the oil sector set for slower growth as global crude prices plunge, this will prompt larger net exports deficits and weigh on gross fixed capital formation, such that we anticipate slower growth over the next decade than in the last.

Hydrocarbon sector weakness will also weigh on Colombia's balance of payment position. Indeed, faltering oil prices and production will temper investment into Colombia and cool export growth. Meanwhile, slower oil production growth combined with increasing pressure to spend on social programmes will feed through to fiscal slippage toward the latter half of our 10-year forecast period. While the country is well positioned to withstand the storm, with low external debt and a sizeable stock of foreign reserves, the potential for deterioration in the country's macroeconomic buffers will temper investor perception of Colombia's sovereign creditworthiness.

We expect the government and Fuerzas Armadas Revolucionarias de Colombia will reach a peace accord in the coming quarters. However, given the splintered nature of the left-wing insurgent group, such a deal will only slowly improve the security environment.

Major Forecast Changes

We have tempered our optimism on Colombia's growth outlook. Our increasingly cautious view toward the country's oil sector will feed through to the economy in a number of ways:

We are now forecasting 3.9% average real GD P growth between 2015 and 2024, further revised down from our previous 4.2% forecast.

This change reflects our expectation that net exports will become a growing burden on headline growth and that gross fixed capital formation, while benefitting from robust infrastructure expansion, will struggle in the face of sluggish oil output growth.

We have revised down our fiscal deficit projections as the continued plunge in oil prices will weigh on Colombia's budget outlook. We now forecast budgetary shortfalls of 3.0% of GDP in 2015 and 2.9% in 2016, after an estimated fiscal deficit of 2.7% of GD P in 2014.

We have revised down our peso forecasts, from COP2,125/USD to COP2,350/USD for 2015, and from COP2,070/USD to COP2,250/ USD in 2016. This reflects our view that weaker than initially anticipated oil prices will weigh on the COP's performance in the year ahead.